That sinking feeling: Are we in a bear market already?

Bears mauled shares in last hour of trade on Tuesday, with the Nifty falling 100 points intra-day, closing below the important support level of 5,500. The Sensex also closed down nearly 300 points from day's high.

The market internals have worsened since the last couple of days. Clearly, it is a "sell-on-rallies" market and today was the perfect example of that. Just when it looked like a short counter turn rally is on the cards we had the second half selling.
As per the trend of last few days, Indian markets are falling in the second half even if Europe opens okay. That is because the general fear in the market is that some of the Europe-based exchange-traded fund (ETFs) are the ones selling in the market. That is what dealers and traders tell you and that is what the volumes also suggest.
The volumes all of a sudden pick up, especially on the days when markets fall like today and by rotation you see some of the largecaps falling big time. Today, stocks like State Bank of India (SBI), Infosys cracked hard. There is panic on the trading side.
Everyday you are seeing lots of Puts being accumulated. It started with 5,500. It trickled down to 5,300. The 5,200 Put added close to 30 lakh shares in open interest. This clearly is the bear market and there is no other way to describe it and that is what the internals of this market have also been suggesting.
Once the Nifty broke the 200 day moving average (DMA) and that is where the importance of the 200 DMA really comes in. Once it breaks that, at every level traders want to short this market and individual stocks. In fact more than 2/3rd (two-thirds) of the Nifty stocks are trading below the 200 DMA.
The foreign institutional investor (FII) number—especially on what has been happening on the ETF front—that really remains the core problem for India. Indian market is now underperforming quite a lot compared to the other Asian markets and some of the other emerging markets. Meanwhile, with the market back to levels last seen in September 2012, U R Bhatt, managing director, Dolton Capital Advisors, talks about the mix of both domestic and global factors affecting investing market sentiment. Talking to CNBC-TV-18, Bhatt said the market has tanked largely due to foreign institutional investors’ (FII) selling. FII selling, albeit marginal, comes at a time when domestic buying has not been there to counter its effect. FII inflows, at USD 2-4 billion every month, were largely responsible for the stability of the domestic market.  Apart from this, a number of other smaller factors have contributed to the negative market sentiment like no solution being reached in the land bill discussion, European problems taking a more serious turn, among others. All these factors have cause nervousness in the market. The bulls have more or less given up, with the 200 DMA being broken quite convincingly. But sentiment could improve if there some stability in the scenario in India or in Europe. News from the US can also embolden investors to take a risk-on approach. The underperformance of the Indian market vis-à-vis others, say Europe, is almost to the order of 17-18%. The market’s underperformance could bring in quick or money for fast trades in the market. So, India can be seen as a matket which would give potential returns at some point of time.  Below is an edited transcript of Ambareesh Baliga of Edelweiss Financial Services’s interview on CNBC-TV18.  Q: Support levels smashed but then again the verdict is that markets aren’t capitulating at this point. How are you reading what is going on?
A: This is what I had said last week. If the markets finally break the good support level of 5,600, we would be moving in the lower band and that’s exactly what has happened. The way I see it is we may not see capitulation in the market. We may not see a big crack in the market but then we would be moving in the next range, which is about 5,400-5,600. Whenever we see the market bouncing back closer to 5,600 levels, we will see enough amount of selling coming in because people who have been stuck in the markets for the last couple of weeks would look at exiting at every higher level.
The way things are over the next couple of months—if we are talking of the next two or three months—I don’t see any reason as to why the market should bounce back very much from here. Q: But exactly what does one do in a market like this? What is your advice to people out there who want to invest?
A: Those who are sitting on quality stocks, I would still say that possibly it is time to wait out. This is not the time actually to put in fresh money and average out your purchases, which were made earlier because it is very much possible that individual stocks could seek much lower levels as compared to the broader index. If you look at the index, it has fallen possibly 15 percent from the higher levels. But then individual stocks have cracked even 50-60 percent. So, it is very much possible that some of these stocks would crack even further. So, it is best to stay out.
Always in an investors life cycle it is prudent to stay out for a while whenever uncertainties like these are there. So, it is best to stay out for the time being holding on to your liquidity. Q: What is your thought as far as earnings season goes?
A: The silver lining is that the expectations are not too high. Expectations are quite tepid as of now and in case of surprises in certain pockets you could see a decent move. For example, we saw those surprises happening in the IT sector last quarter and after that we have seen a good move, so similarly, this time if you have any surprises you will see especially those stocks or sectors moving up.